Impact bonds falling short of minimum standards for sustainability

Press Release
| Insight Investment

The market for impact bonds is increasingly diverse but many of the instruments coming to market fall short of the minimum standards for sustainability set by Insight Investment, a leading global asset and risk manager. So far in 2019, Insight has marked 10 green bonds as red on its proprietary rating scheme, up from just one marked red in 2018.

Estimates
suggest that achieving the United Nation’s Sustainable Development Goals will
require US$5trn to US$7trn of total investment by 20301. Impact
bonds – where proceeds are used for positive environment or social themes – are
expected to be instrumental in reaching this target. But there is a pressing
need for greater alignment between the objectives of these bonds and the
strategic interests of the entities issuing them, says Insight.

“Too many impact bonds are simply bolt-on
sustainability programmes, quite separate to the ongoing activities of their
issuers’ day to day businesses,” said Josh Kendall, senior ESG analyst at
Insight Investment. “It prompts the question; how authentic are these bonds? We
want to reach a point where there is no distinction between a bond’s impact
objectives and its issuer’s core operational activities.”

Insight’s
analysts assign a traffic light score to impact bonds, denoting suitability for
inclusion in credit portfolios. Red can indicate a variety of concerns, but
most commonly around transparency on how proceeds will make an environmental
difference. Issuance continues to be dominated by governments, financials and utilities
but there is increasing diversity; three telecommunications companies issued
impact bonds in 2019 and were oversubscribed.

“Increased
diversity is positive but impact initiatives in sectors such as utilities may
ultimately effect greater change because they achieve efficiencies in more
carbon intensive industries. Our focus for assessing the value of these bonds
is the alignment with the issuer’s core business and a commitment to
quantitative, transparent reporting on the bond’s impact.”

2 As of 31 March 2019. Assets
under management (AUM) are represented by the value of cash securities and
other economic exposure managed for clients. Reflects the AUM of Insight, the
corporate brand for certain companies operated by Insight Investment Management
Limited (IIML). Insight includes, among others, Insight Investment Management
(Global) Limited (IIMG), Insight Investment International Limited (IIIL) and Insight
North America LLC (INA), each of which provides asset management services.